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4 Reasons Why U.S. Growth Will Strengthen

The services industry got a boost recently with the news that
a highly regarded barometer of its performance came in with
strong numbers. The latest Institute for Supply Management, or
ISM, non-manufacturing data indicates a pickup in service
industries growth in July. The ISM non-manufacturing data is
complied from an anonymous questionnaire that goes out to 375
purchasing executives in the U.S., and is widely respected as one
of the most important economic indicators available to
investors.

Given that any reading greater than 50 indicates expansion in
the economy, investors must have been particularly pleased to see
the headline non-manufacturing Purchasing Managers' Index, or
PMI, come at 58.7, with business activity at 62.4 and new orders
surging to 64.9 -- all three numbers indicate strong growth. In
fact, the headline number is an all-time high. There is no doubt
that services growth is gaining momentum; can investors conclude
that the second half of 2014 will see stronger growth in the
U.S.?

Here are four reasons why the answer to that question should
be "yes."

ISM non-manufacturing and manufacturing agree

While the ISM non-manufacturing data covers nearly 90% of the
U.S. economy, the organization's manufacturing data has a longer
history of being used as a benchmark for the economy. The good
news is that both ISM surveys are moving in tandem, a sign that
recent strength isn't restricted to one part of the economy or
driven by particular strength in any one industry.

As the chart above demonstrates, the two indices tend to move
together, but there are periods of divergence, most notably in
the last quarter of 2013. The fact that both indices declined
dramatically in the first quarter of 2014 indicates that the
severe winter weather (rather than any underlying deterioration)
did have a strong effect on the economy.

ISM manufacturing new orders lead the way

Focusing on the ISM manufacturing data for the moment, the
following chart demonstrates that the new orders component tends
to lead the headline PMI data.

Source: Institute for Supply Management.

The new orders data suggests that manufacturing growth is
going to come back strongly in future months. In addition, it
looks as if underlying growth is strong in the economy, because
the data is picking up from where it left off in the latter half
of 2013. Moreover, growth in manufacturing was broad-based last
month, with the ISM survey noting that 17 of the 18 manufacturing
industries reported growth.

Factory Orders and Durable Goods

The latest factory orders data from the Commerce Department
also indicate growth. Manufacturers' new orders (excluding the
volatile transportation sector) came in with 1.1% year-over-year
growth in June, while durable goods orders increased 1.7% on the
year. Durable goods are usually seen as more reflective of the
manufacturing economy at large. Moreover, cyclical sectors
machinery and computers and electronic products both recorded
2.9% growth -- a good sign for future growth.

Again, the following chart demonstrates the recovery in
durable goods orders after a weak start to 2014. It backs up the
ISM manufacturing data.

Anecdotal evidence

Finally, the ISM data is backed up by anecdotal evidence from
companies. For example, aluminum producer
Alcoa
recently gave an upbeat assessment of global industrial
conditions, which investors can read about
here
.
Emerson Electric
also served notice of its expectation that its second half of
2014 will improve upon a disappointing first half.. For
example, its order growth came in at 9% in the second quarter;
more on that
here.
Finally,
Caterpillarrecently increased
its full-year construction machinery sales forecast, which
projects 5% to 10% growth.

The takeaway

All told, the latest ISM data reflects a stronger economy in
the U.S. Granted, it's not clear yet if this is merely a bounce
back from weakness in the first half adversely affected by
weather. However, the underlying data and anecdotal evidence
suggest that U.S. growth remains on track in 2014. Leading
indicators such as new orders demonstrate ongoing strength, and
some of the more cyclical areas of the economy are starting to
see spending again.

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